Decentralized finance (DeFi) allows individuals and organizations to participate in lending markets without needing a trusted and permissioned third-party institution acting as an intermediary between borrowers and lenders. Thanks to its innovations, there has been explosive growth in this market's activity over the past few years, currently reaching $115billion in total value locked (TVL).
However, while the first and second generation of lending platforms allow users to collateralize and borrow the most liquid ERC20 tokens and, with limited capability, the less liquid ones, there still exists a long tail of crypto assets that remain underserved. Thanks to the rise of Decentralized Autonomous Organizations (DAOs), a new form of on-chain asset, the vesting contract, was introduced. These contracts are among the primary mechanisms that distribute tokens to investors and protocol contributors in a predictable manner.
DAOs are a new structure that enables the organization of large groups of people around a single mission, vision, or interest and are becoming Web3’s version of institutions/corporations with their own balance sheets, cash flows, and corporate structures. A testament to their popularity is that their treasuries hold over $20B and that new DAOs are being formed daily spanning crypto, finance, metaverse, NFTs, and many more.
DAO investors and contributors are rewarded for their participation in the protocol by receiving the DAO’s native governance token. Typically these tokens are not paid out to participants immediately, but instead over time through a vesting contract that vests exactly according to pre-defined conditions. Unfortunately, even though the cash flows from a vesting contract are perfectly predictable, no lending protocol offers the option to borrow against it.
This inability of DAO protocol participants to collateralize their positions results in numerous negative consequences such as:
To address these problems we present Juice, the first lending protocol that enables the collateralization of both vesting contracts and DAO tokens.
Juice enables DAO investors and contributors to access the liquidity of their vesting contracts by allowing them to borrow stablecoins against the entirety of their contract value. As a result, vesting contract owners can obtain liquidity in a tax-efficient manner, without losing governance control and the equity upside.
Given the current lack vesting contract standardization, borrowers need to register their vesting contracts with Juice’s adapters to enable borrowing. The purpose of this is to retrieve specific data, which enables collateral value calculation and the transfer of contract ownership to Juice. The latter step is needed to prevent the original vesting contract owners from claiming tokens while they have outstanding borrowed funds.
On Juice, a discount rate is used to give the fair present value of a vesting contract by adjusting the unvested portion for time value risk. A discount rate is needed because although a vesting contract contains the same tokens, it is important to distinguish that the vested (liquid) tokens are worth more than the unvested (illiquid) ones when calculating borrow capacity. As such, unvested tokens get increasingly discounted the further out in the future they vest (convert to liquid tokens).
